Yahoo Finance The Best Budgeting Strategies for Your First Job
Your first job can be one of the best times of your life to learn to budget properly, and one of the worst. In your favor is the fact that you may not have much debt, aside from student loans. Fewer college students have credit card debt these days, a result of the Credit CARD Act of 2009, which made it more challenging for adults under age 21 to qualify for a credit card.
But the debt you do have is probably pretty significant, and you probably aren't making much money.
Earlier this year, a Fidelity survey of 750 college graduates indicated that the average student graduates with $35,200 in college-related debt, generally a soup of federal, state and private loans as well as debt owed to family members and credit cards. Meanwhile, a report released in April by the National Association of Colleges and Employers stated that the average 2013 graduate's starting salary is $44,928. (If you're a recent graduate making well below that, remember that you're competing with entry-level engineers and computer science graduates, groups that pull up the average and tend to make significantly more than, say, graduates of humanities and social studies programs.)
So if you're a recent graduate and in the first year or two of your first job, and you're wondering how to divvy up your paychecks, here are some strategies.
Keep your initial costs as low as you can for now. Justin Coffey, who just turned 23, graduated from Rhode Island College earlier this year and now works at a marketing firm in Providence, R.I. He started his first job in late August and understandably doesn't want to publicly state his annual income.
[Read: 8 Steps to Creating a Personal Budget.]
"I'm making an entry-level salary for someone with an undergraduate degree in a full-time position," Coffey says. Since he has minimal bills, he adds, he has more than enough income to live on. His parents, he says, also help pay some of his bills.
But Coffey has helped himself immensely by not giving into the temptation to buy a house and a new car the moment steady paychecks started rolling in. He's living with roommates, so his rent is less than $400 a month, including utilities, although he expects rent to go up in January. He says much of his money goes toward gas for his commute. "I drive a truck that doesn't get really great gas mileage, so I spend well over $50 a week for gas, which can add up fast," Coffey says. "Once the winter in New England is over, I'll look into buying something a little more fuel-efficient."
That would be wise, and it would be wise for Coffey to carefully buy his next set of wheels and not get roped into making payments for the next six years. After all, his student loan payments will kick in early next year, and he expects to be paying around $100 a month. Between the car, the additional rent and the student loans, his expenses will go up markedly. Until August 2014, when he will have been with his employer for a year, he is pretty much assured that his salary won't.
Know the basics. Stephanie Sherman, a certified financial planner at Prudential Financial and based in Newark, N.J., recommends that as soon as you're hired, start looking at the benefits your employer offers, such as a 401(k) match or commuter reimbursement, "so that you can take advantage of them."
After you've calculated what you'll have taken out of your paycheck, generally your health insurance and what you're setting aside for retirement, Sherman says you should start budgeting by writing down all of your costs, which, for most people, will shake out to be: rent, renters' insurance, car payments, car insurance, transportation costs (gas or parking fees), utilities, phone and Internet.
"These are typically considered 'fixed' expenses, but I try to remind my clients in this situation that there is some control over how much you spend on these fixed expenses," Sherman says.
[Read: How to Save More Before the End of the Year.]
In other words, you could do things like find a cheaper place, bring in a roommate or consider biking or carpooling to work.
After you've calculated your fixed costs, Sherman recommends moving on to discretionary expenses, like groceries, clothing or entertainment - and making sure some money is left over for savings. Ideally, Sherman says, you should be working to build an emergency fund that can cover four to six months of expenses, and then another fund for something else you know you want to do eventually, like take a vacation, buy a house or earn an advanced degree.
Another way to look at it, says Elle Kaplan, CEO of Lexion Capital Management LLC, an investment management firm in New York City: "Use the 50-30-20 approach. Fifty percent of each paycheck goes to bills and necessities - your rent, bills, groceries. Thirty percent is spendable income for lifestyle expenses, such as entertaining and clothing, and 20 percent goes to savings. Think of it as paying for your future self."
True, if you're making well under the $44,928 average starting salary, and your fixed costs include some massive student loans, that may be easier said than done. But you should try to get in the habit before your future self buys the house, starts acquiring pets, marries and has kids. "The younger you start to save, the more flexibility you will have later," Sherman says. "And the only way to save is to spend less."
Add expenses carefully and slowly. Priya Haji, CEO of SaveUp, a free online rewards program that encourages consumers to save and get out of debt, says when you're in that first job, you should avoid or at least be choosy with subscription services like Netflix and cable. "Things that auto bill every month without you thinking of them are a way to get you to overspend," Haji says.
[See: 10 Ways to Cut Your Spending This Week.]
Which may mean Coffey should rethink the gym membership he recently signed up for. On the other hand, if he uses it, he'll be creating another good habit that could pay off for years to come. And that is what learning to budget when you're in your first job is all about - creating good habits, like paying bills on time and saving for retirement and emergencies.
"The temptation is to postpone saving until later. For many, that day comes too late," says James Heafner, president of Heafner Financial Solutions, headquartered in Charlotte, N.C. He says too many people delude themselves by saying "I'll make a lot more money later, and then I will be able to save."
But for too many people, Heafner says, later never comes.
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